Silver Smoke Screen

There was a very interesting and potentially significant development dropped into the silver equation this week. I’m speaking of the appearance of the head of commodities for JPMorgan, Blythe Masters, in a short interview Thursday on CNBC. There has already been widespread reaction to the clip and I must admit that it touched off a whirlwind of different thoughts in my mind. Quite frankly, I’m glad I’ve had a bit of time to sort them out before commenting.

I first discovered and revealed that JPMorgan was the big concentrated short in COMEX silver in the fall of 2008 (having inherited the position from Bear Stearns). Since then, Ms. Masters has become somewhat of a lightening rod in the silver manipulation discussion world. Although I don’t believe I have ever mentioned her by name, she has been, more often than not, vilified in most Internet quarters. While I can empathize with the extreme sentiments that can arise from the outrage over the lingering silver crime in progress and the damage that it has caused to many, I don’t see much benefit in personal attack. Now, more than ever, we need to focus on the facts.

Since my thoughts are varied, let me see if I can put them into some semblance of order. First, let me give you my visceral feelings and then settle into a more measured and objective analysis. There were quite a few important statements that did come from the interview that go to the very heart of my allegations of manipulation in silver by JPMorgan. I won’t dwell on my knee-jerk reactions, but I do feel I should make them known.

There is no doubt that this wasn’t a spontaneous event. The presentation wasn’t accidental. I’ve watched CNBC fairly religiously for as long as it has been in existence (but with the sound muted for much of the day) and the last firm recollection I have of any mention of a silver manipulation was more than three years ago, when Joe Kernan commented on the Wall Street Journal article on Sep 25 2008 about a CFTC investigation into silver. I remember him joking about some new Hunt Bros plot to drive prices higher. Never again have I heard the silver manipulation mentioned on that network. CNBC has never seriously broached the subject to my knowledge. So I was taken back when the reporter specifically asked about the allegations of manipulation in silver, as if they were widely recognized as common knowledge. I got a special kick out of the reference to all these allegations coming from the “blogosphere.” (As opposed to the mainstream media, I suppose).

It would be safe to say that the interview tried to present JPMorgan as a contributor to worthy causes, who would never dream of manipulating silver and as a strong proponent of financial regulatory reform. All of JPMorgan’s positions in silver were claimed to be non-directional and only transacted to accommodate legitimate client hedging needs. To the typical CNBC viewer, who has little interest in silver to begin with, I would imagine that the segment appeared little more than a puff piece on an obscure topic. But I doubt that this was all that it was. There was an intent and purpose to this presentation, as many have already suggested.That’s what makes it so potentially significant.

To my knowledge, this is the very first time that JPMorgan has openly acknowledged the allegations against it for manipulating the price of silver. Please think about that. It’s been more than three years, dozens of class-action lawsuits and a ton of reputational abuse (remember “sink JPM, buy a Silver Eagle”?) and this is JPMorgan’s first rebuttal? Years ago, I used to wait for process servers and Fed Ex-delivered cease and desist demands; but I had just about given up on JPMorgan ever responding since so much time had passed. Don’t get me wrong, I’m very glad not be sued; but I am a little underwhelmed with how JPM finally did respond. I can’t help but ask myself – why now and in this tepid a manner? A public relations campaign on CNBC to an audience not remotely aware of the allegations to begin with hardly seems the lasting solution to making the problem go away. So what was the motivation?

Here’s where all the knee-jerk conclusions come in that just might be correct – they are feeling the heat, maybe they know something may be forthcoming from the CFTC and are trying to stay ahead of the fall-out. My friend and mentor, Izzy Friedman, says they see the physical shortage about to hit, but none of us can be the fly on the wall and know the details. But we agree that the appearance likely means JPMorgan may be in trouble of some sort. JPM sees no other way out than to claim their COMEX silver short position was and is legitimate and they are prepared to stick to that story come hell or high-water. The beautiful thing is that, no matter what, this is great news. The fact that JPMorgan has spoken up first on the allegations of them manipulating the price of silver and not the CFTC, is particularly good news. (More on that later).

Best of all, this may and should open a dialogue on this issue. Ms. Masters gave very reasonably-sounding explanations to the allegations of silver manipulation. But they were very simple explanations offered in the blink of a TV sound bite. To those convinced that silver is not manipulated, her words explained all. To those convinced that silver is manipulated, her statements were false and misleading. That’s because the questions and answers in the TV segment were prepared and scripted. But because they only barely penetrated the surface, they fell far short of setting the matter to rest.

The great thing is that this can be resolved with just a little further explanation. You see this is not an instance of he said, she said. This is a case of fact and commodity law and the right questions and answers. So let’s drill down to the answers given to see if they really addressed the allegations.

The main theme advanced by Ms. Masters is that JPMorgan holds no unhedged silver positions and all its short positions are a direct result of offsetting client positions in the OTC or swaps market. Therefore, it matters little to JPMorgan whether the price of silver rises or falls. For the sake of argument, let me stipulate for the moment that JPMorgan has offsetting client positions behind their big net short position on the COMEX. I don’t believe there are truly legitimate client positions backing JPMorgan’s COMEX short position, but let’s set that aside for a moment while I try to show that client offsetting positions or not, JPMorgan’s COMEX short position is still manipulative. JPMorgan claims they are not manipulating silver, but those are just words. Their actions are quite different. What’s more important, words or actions?

The allegations against JPMorgan for silver manipulation are centered on their concentrated short position on the COMEX. Nothing more, nothing less (aside from HFT). Claiming there were some unspecified client positions offsetting the concentrated short position doesn’t alter, in any way, the fact that the concentration still exists. The point is not the nature of what may be responsible for the concentrated short position, but the concentrated position itself. Even if JPMorgan owned every ounce of silver they held short on the COMEX in physical form, holding 25% or so of any licensed futures market would be manipulative to the price, in and of itself. It doesn’t matter what excuse is given for holding an excessively concentrated market share; such a market share would be manipulative.

If a single trader held a 25% share of any other major futures market, say in crude oil or corn, there would be emergency meetings and decrees to break that concentration before the sun went down. Farmers would be descending on Washington, DC in tractors if a New York big bank held a short position equal to 25% of the Chicago Board of Trade’s corn futures market. It wouldn’t matter one wit to the regulators what was behind the position. Such a market share in a major commodity futures market would be unthinkable. But 25% has been JPMorgan’s usual share of the net COMEX silver (minus spreads) since it took over Bear Stearns and often it has been much larger than 25%. JPMorgan can’t deny that market share in silver as that is borne out in government statistics, so it is doing the next best thing - trying to change the issue into what may be behind the position. What’s behind the position doesn’t matter; the position itself matters.

I’ve often said that I think JPMorgan is stuck with their excessively concentrated silver short position on the COMEX. This TV attempt to explain it all away strengthens my conviction. The thing about the concentrated short position is that there has always been one big silver short holder on the COMEX. It started with Drexel Burnham, got moved to AIG Trading, on to Bear Stearns and, finally, to JPMorgan. My sense is that it won’t be passed on again. JPMorgan is the final holder and I sense them knowing that may be behind the attempt to explain it away. Never, in the 25 years I have been engaged in attempting to end the silver manipulation, has there ever been a public acknowledgement from the big silver short. There is one now.

If holding a giant COMEX short position is such a sweet deal, why wasn’t JPMorgan holding such a position prior to Bear Stearns’ demise? If legitimate client positions stand behind JPM’s short position that implies most of the world’s silver hedgers only do business with JPM, no one else. Why aren’t other banks and financial institutions looking to compete with JPMorgan on the short side of silver and edge them out? That’s because no other firm wants to get stuck like JPM is stuck and reduced to offering flimsy excuses to pre-arranged softball questions on TV.

The CFTC tracks and reports positions and concentration data by individual trading entities based upon who controls the account. If a legitimate hedger wants to sell short on the COMEX to hedge production or inventory it can do so in its own name and for its own account. It doesn’t need to join with others and do it in someone else’s name and in concentrated form. There is no legitimate reason why JPMorgan’s clients can’t hedge in their own names to the extent JPMorgan is claiming, especially since allegations of concentration and manipulation are being lodged against JPMorgan. You would think that JPMorgan would be doing more than pleading their case on TV. One would think JPMorgan would advise clients to hold the COMEX short positions in the customers own names to reduce JPM’s concentration.

Unless, of course, that there is only one major client behind JPMorgan’s concentrated COMEX silver short position. In other words, if JPMorgan is representing only one or a very few related clients and that is what backs the concentrated short position on the COMEX, then that raises the issue to a whole new level of possible criminality. If JPMorgan is facilitating and enabling an unnamed client or clients in holding a concentrated short position by agreeing to put it in JPM’s name on the COMEX, then JPM may be the transfer mechanism in what can only be described as hiding the identity of a market manipulator. The terms aiding and abetting and fraudulent conveyance come to mind. In many ways, particularly if the real hidden short is foreign and outside US jurisdiction, that’s even worse than JPMorgan holding the position itself. Enabling a foreign entity to evade US commodity law and manipulate a US futures market? This gets worse the deeper you dig.

Much is made of the great size of the OTC market when compared to the COMEX. While I think that claim is bogus, many insist that the OTC market (including the LBMA) is much bigger than COMEX. In fact, the client positions that JPMorgan claim backs the concentrated short position on the COMEX, are implied to be OTC positions. But if the OTC market is so much bigger than the COMEX and JPM is the acknowledged leader in OTC trading, then why doesn’t JPMorgan just hedge its client’s OTC positions with other OTC positions? Why resort to selling short so excessively on the COMEX where it gets picked up in CFTC data? If JPMorgan offset their clients’ OTC positions with other OTC positions, we wouldn’t be having this discussion. All these positions wouldn’t be included in the COT and Bank Participation Report data and I wouldn’t be able to analyze and write about it.

This is also what makes all the threats about traders abandoning our listed and regulated exchange traded markets to the regulatory-free big international OTC markets a pile of junk. Because the COMEX is the most important derivatives market in the world for precious metals, any large silver derivatives position must be reflected in COMEX positioning. If JPMorgan could just make this COMEX concentrated short position disappear by dealing instead on the OTC market, they would have done so long ago. The simple answer is that they can’t because the OTC market is smaller than the COMEX. JPM is reduced to trying to convince anyone who will listen that the COMEX concentration doesn’t matter because the real big short is someone else hiding behind a tree that you can’t see because of client confidentiality. It’s no wonder many folks are coming to hate the banks, because the banks always have a slick answer to what we all know is simply bad behavior. How about the reporter asking JPMorgan what the heck are they doing trading in silver in the first place? Shouldn’t they be out taking deposits and making loans like banks are supposed to?

The real problem is that the COMEX sets the price of silver for the world. Therefore, JPMorgan’s concentrated short position, by its size, unduly influences the price of silver. Manipulation aside, this gives JPMorgan control of what price its clients transact in the supposed private silver hedges with JPM. This is a serious conflict and certainly not in the clients’ best interest. What fair and open good business practice would permit JPMorgan to first set the price on the COMEX and then use that price to transact hedges with clients at the “set” price?

It is because I go so far back with this silver manipulation that I see it in a different perspective than most folks. Eight years ago, on May 14, 2004, the CFTC made public a long letter which denied that any silver manipulation existed. The letter took aim at me (not mentioning me by name) and concluded that investors had best be very careful before investing in silver. On the day of the letter, the price of silver was around $5.60.

Almost to the day four years later, the CFTC released another long public letter, dated May 13, 2008, which basically re-iterated that there was no silver manipulation or undue concentration on the short side on the COMEX. On the date of this letter, the price of silver was $16.66.

I’m not much for cycles, but it would appear that we may be at the anniversary of a four-year cycle that began in 2004. The question is if we will get yet another long-winded and soon disregarded public letter from the CFTC assuring us there is nothing wrong in silver or will it play out differently this time? The remarkable thing is that the first two CFTC letters had absolutely no effect on persuading growing numbers of observers that silver wasn’t manipulated. Even more remarkable is that the basic issues haven’t changed over the past 8 years. The only thing that changed was the big silver short. In 2004, it was AIG Trading; in 2008, it was Bear Stearns. Today, it is JPMorgan.

One thing I am encouraged by in JPMorgan’s breaking of the silence is that it may indicate real change. Prior to now, the CFTC always did the dirty work for the silver manipulators. By publicly denying that a silver manipulation existed in 2004 and 2008, the CFTC automatically protected and coddled the silver manipulators, who didn’t have to answer to anyone. This CFTC cover also protected, effectively, the silver crooks from civil litigation. The COMEX commercial crooks, including the CME Group, could always hide behind the CFTC’s skirts and proclaim that they were highly regulated and if they were doing anything wrong, the CFTC would say so. If the CFTC protecting the silver crooks didn’t cause your blood to boil, you need new blood.

Please don’t get me wrong; it is shameful and deplorable that the CFTC has taken no action against the silver manipulators for so long. But one possible advantage to that delay now is that it may be forcing JPMorgan to speak out instead. That’s much better. Particularly given how hollow JPM’s words were in their first public defense. Of course, the CFTC can still manage to cover themselves with additional shame if they do decide to side with JPM and the CME once again. For the sake of everything that is still good with the US, let’s hope they don’t. Let’s hope that the CFTC continues to allow JPMorgan to explain its concentrated short position.